Wednesday, April 18, 2012

Three cheers to RBI

IPL cheer leaders were seen doing a jig outside RBI yesterday and why not? In it's annual monetary policy announced on Tuesday, RBI took the market by surprise and cut rates by 50 bps.  RBI raised rates 13 times between March 2010 and  October 2011 in its struggle to contain inflation and in the bargain maiming economic growth which was at a meager 6.1% in quarter ended December 2011, it's slowest in three years. 

Policy highlights:
  • Repo rate was reduced from 8.5% to 8%, reverse repo is at 7% and CRR remains unchanged at 4.75%
  • Lower inflation figures in March and sharp fall in industrial production brought about the drastic change in RBI's stance from being cautious to reducing interest rates aggressively (twice of market expectation)
  • This move of RBI clearly indicates that focus has shifted to growth and would remain so as long as growth - inflation dynamics remain in the right direction
  • This somewhat sharp cut is to prod banks to swiftly transmit benefits to customers.  
  • RBI is comfortable with current liquidity conditions but is watchful and prepared to take necessary steps if and when warranted
  • RBI's Baseline expectation for GDP for FY 13 is 7.3% compared to projected 6.9% in FY 12 which just ended.  Headline inflation is expected to end the current year at 6.5%
  • RBI also underlined the need to decontrol diesel, LPG and kerosene prices despite risk of inflationary pressures.  This would cap subsidy burden and ease ballooning  fiscal deficit 
  • Central bank has proposed removal of foreclosure charges or prepayment penalties on home loans bearing floating interest rates.  Though some banks are following this already, this has now been formalised

So what's in it for us?  Imminent reduction in deposit and lending rates though reduction in home loan rates may not be immediate.  Reduced interest cost will be a huge relief to ailing India Inc. Also falling interest rate should boost investment which is much needed to bolster growth and does not pose immediate  inflationary pressure. Though it is made to look like a front loaded move and Governor seems to signal pause for the rest of the year, we expect further reduction of 50 to 75 bps later this year.  This sounds very optimistic, but isn't that the need of the hour?  

Hippity hip hurrah!

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